RateSetter sellout excessive fees for "income" products.
Aug 19, 2014 10:22:34 GMT
mrclondon likes this
Post by sl75 on Aug 19, 2014 10:22:34 GMT
First, I'll caveat by saying that I have no intention of selling out the remainder of my 3 year income contracts, even if the fee were reduced to zero, so I'm merely using my own account as an illustrative example.
My remaining "3 year income" loans have between 3 and 6 repayments remaining, so I'll get the money back anyway within the next 6 months. As they are at rates that are highly attractive compared to what is available today (ranging from 6.5% to 6.9%), any recipient of loans allocated under such a hypothetical sellout would be quite lucky indeed. There is thus no "assignment fee" and the fee shown is solely the exit fee charged by RateSetter themselves (as I am able to see directly when clicking "next step").
If I'd been re-investing the capital in that same 3 year market, I'd have about £10k of loans to sell out, and might not even notice this highly excessive fee for the earlier loans - simply having a feeling that an extra couple of % on the full £10k sellout quote was "a bit higher than I'd expected", but not being able to see any details of why.
In fact, even on this quote, a proportionally higher fee is "hidden", as if I get a quote for receiving only £337.17, the fees reduce to £88.48, meaning that if I proceeded I would have been charged a £13.43 fee in order to receive the last £29.57. That last £30 (and a few more) will be repaid in full anyway during the next 3 months, so RateSetter wish to charge me around (13.43 / 29.57) / 3 = 15% per month for early access to this last £30.
They justify this on the basis of a difference between what you would have received and what you actually received, but this doesn't even pass a basic sanity check.
The "exit value" before fee is £468.65, and the fee of £101.91 is over 21% of this, which has been lent out for less than 3 years, implying that RateSetter believe I got an annual amount more than 7% higher than I "would have got". As the rates on these loans are all below 7%, this implies that I "would have got" a negative return on the remaining £468.65 if I'd invested it for a shorter period, which is of course complete nonsense.
(In fact the reason is that RateSetter have used a non-intuitive definition of "what you would have got", which works in their favour, they claw back interest not only from the amount you're cashing out, but also the entire interest earned under the income contract, even for the capital that has already been repaid as originally agreed under the "income" contract).
I am not a lawyer, but my understanding is that when a term in a contract is ambiguous[1], a court would resolve it favour of the party who did not draft the contract. I would suggest that the most obvious interpretation of saying that I'll pay a fee to reduce my return to "what I would have got" in the next shortest market would be along the lines of:
(amount cashed out) MULTIPLIED BY ((interest rate received) MINUS (lower interest rate)) MULTIPLIED BY (period of investment in years)
(this would of course be calculated per-loan, but can be approximated in aggregate) In this case:
£468.65 * (6.7% - 5.0%) * (less than 3) = less than £23.90
i.e. a much more reasonable (albeit still quite high by P2P exit fee standards) fee in the region of 5% or less.
Last year I had fully intended to go through this in detail with the new regulator, offering to go through the motions of selling out if they needed an actual excessive charge to investigate rather than merely an automated quote that was excessive. But I have a lot of other important things to take care of, so don't really have the resources to fight other people's battles for them...
However, if anyone else has needed to sellout a sufficiently mature portfolio of 3 or 5 year income loans, and had a general feeling that the fee was "higher than I'd expected", but simply assumed that it was correct because it was what RateSetter's computers said, you may wish to seek further advice about it, particularly for a larger amount where the amount of excess fee charged would be enough to care about.
The above is intentionally an example close to the extreme worst case (I first noticed the effect last year, discussed it with RS's management and on other forums, and subsequently have intentionally waited until about now in order to allow the example to become more extreme) in order to drive home the point.
Regardless of this particular issue, there also seems to be a further problem, even with the interpretation that is in RateSetter's favour - the sellout fee appears to be based on the gross interest rate, rather than the rate net of RS's lending fee, and there doesn't seem to be any indication on the quote that RateSetter will rebate the difference between the lending fee they actually charged and the lending fee they would have charged... (it's also unclear whether HMRC would also allow the "exit fee" and "assignment fee" to be set against income). In some cases, the resulting return may thus be lower even than what RateSetter had intended when specifying the design for this over-complicated calculation (which works in their favour compared to the more obvious and simpler alternative).
[1] "The exiting Lender’s interest is reduced to the level they would have received based on the length of time they have ended up lending for. This is based on the Market Rate and products available on the day they originally lent. So, for example, if you had lent into the 5 Year Income market nine months ago and choose to exit now, you would only receive the interest you would have got from lending in the Monthly Access market for that period of time; if you had lent 13 months ago you would only receive what you would have got from lending in the 1 Year Bond market; if you had lent 37 months ago, you would only receive what you would have got from lending in the 3 Year Income market. With regard to an early exit from the Monthly Access market, the cost is that you forego all the interest for that month. There is a minimum charge of 0.25% of outstanding capital. The purpose of this charge is to ensure there is no incentive to lend for five years if your intention is only to lend for two years;" from www.ratesetter.com/noticeboard-item/sellout.htm makes no mention of clawing back interest from capital that has already been repaid, so the most obvious interpretation (and that which is favour of the party which didn't draft the contract) seems to me that this difference applies only to the interest that accrued on the capital that you are actually selling. This difference in interpretation is relevant only for the "income" markets.
My remaining "3 year income" loans have between 3 and 6 repayments remaining, so I'll get the money back anyway within the next 6 months. As they are at rates that are highly attractive compared to what is available today (ranging from 6.5% to 6.9%), any recipient of loans allocated under such a hypothetical sellout would be quite lucky indeed. There is thus no "assignment fee" and the fee shown is solely the exit fee charged by RateSetter themselves (as I am able to see directly when clicking "next step").
If I'd been re-investing the capital in that same 3 year market, I'd have about £10k of loans to sell out, and might not even notice this highly excessive fee for the earlier loans - simply having a feeling that an extra couple of % on the full £10k sellout quote was "a bit higher than I'd expected", but not being able to see any details of why.
In fact, even on this quote, a proportionally higher fee is "hidden", as if I get a quote for receiving only £337.17, the fees reduce to £88.48, meaning that if I proceeded I would have been charged a £13.43 fee in order to receive the last £29.57. That last £30 (and a few more) will be repaid in full anyway during the next 3 months, so RateSetter wish to charge me around (13.43 / 29.57) / 3 = 15% per month for early access to this last £30.
They justify this on the basis of a difference between what you would have received and what you actually received, but this doesn't even pass a basic sanity check.
The "exit value" before fee is £468.65, and the fee of £101.91 is over 21% of this, which has been lent out for less than 3 years, implying that RateSetter believe I got an annual amount more than 7% higher than I "would have got". As the rates on these loans are all below 7%, this implies that I "would have got" a negative return on the remaining £468.65 if I'd invested it for a shorter period, which is of course complete nonsense.
(In fact the reason is that RateSetter have used a non-intuitive definition of "what you would have got", which works in their favour, they claw back interest not only from the amount you're cashing out, but also the entire interest earned under the income contract, even for the capital that has already been repaid as originally agreed under the "income" contract).
I am not a lawyer, but my understanding is that when a term in a contract is ambiguous[1], a court would resolve it favour of the party who did not draft the contract. I would suggest that the most obvious interpretation of saying that I'll pay a fee to reduce my return to "what I would have got" in the next shortest market would be along the lines of:
(amount cashed out) MULTIPLIED BY ((interest rate received) MINUS (lower interest rate)) MULTIPLIED BY (period of investment in years)
(this would of course be calculated per-loan, but can be approximated in aggregate) In this case:
£468.65 * (6.7% - 5.0%) * (less than 3) = less than £23.90
i.e. a much more reasonable (albeit still quite high by P2P exit fee standards) fee in the region of 5% or less.
Last year I had fully intended to go through this in detail with the new regulator, offering to go through the motions of selling out if they needed an actual excessive charge to investigate rather than merely an automated quote that was excessive. But I have a lot of other important things to take care of, so don't really have the resources to fight other people's battles for them...
However, if anyone else has needed to sellout a sufficiently mature portfolio of 3 or 5 year income loans, and had a general feeling that the fee was "higher than I'd expected", but simply assumed that it was correct because it was what RateSetter's computers said, you may wish to seek further advice about it, particularly for a larger amount where the amount of excess fee charged would be enough to care about.
The above is intentionally an example close to the extreme worst case (I first noticed the effect last year, discussed it with RS's management and on other forums, and subsequently have intentionally waited until about now in order to allow the example to become more extreme) in order to drive home the point.
Regardless of this particular issue, there also seems to be a further problem, even with the interpretation that is in RateSetter's favour - the sellout fee appears to be based on the gross interest rate, rather than the rate net of RS's lending fee, and there doesn't seem to be any indication on the quote that RateSetter will rebate the difference between the lending fee they actually charged and the lending fee they would have charged... (it's also unclear whether HMRC would also allow the "exit fee" and "assignment fee" to be set against income). In some cases, the resulting return may thus be lower even than what RateSetter had intended when specifying the design for this over-complicated calculation (which works in their favour compared to the more obvious and simpler alternative).
[1] "The exiting Lender’s interest is reduced to the level they would have received based on the length of time they have ended up lending for. This is based on the Market Rate and products available on the day they originally lent. So, for example, if you had lent into the 5 Year Income market nine months ago and choose to exit now, you would only receive the interest you would have got from lending in the Monthly Access market for that period of time; if you had lent 13 months ago you would only receive what you would have got from lending in the 1 Year Bond market; if you had lent 37 months ago, you would only receive what you would have got from lending in the 3 Year Income market. With regard to an early exit from the Monthly Access market, the cost is that you forego all the interest for that month. There is a minimum charge of 0.25% of outstanding capital. The purpose of this charge is to ensure there is no incentive to lend for five years if your intention is only to lend for two years;" from www.ratesetter.com/noticeboard-item/sellout.htm makes no mention of clawing back interest from capital that has already been repaid, so the most obvious interpretation (and that which is favour of the party which didn't draft the contract) seems to me that this difference applies only to the interest that accrued on the capital that you are actually selling. This difference in interpretation is relevant only for the "income" markets.